THE COMMISSIONER OF INCOME TAX vs. M/S RATIONAL SOFTWARE CORPORATION

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

Dated this the 22nd day of June, 2015

Present

THE HON’BLE MR JUSTICE VINEET SARAN

THE HON’BLE MR JUSTICE ARAVIND KUMAR

Income Tax Appeals 205 c/w 204 & 206 / 2009 Between

1 Commissioner of Income Tax

C R Building, Queens Road

Bangalore

2 Asst. Commissioner of Income Tax

Circle 12(4), C R Building

Queens Road, Bangalore

Appellants

(By Sri K V Aravind, Adv.)

And

M/s Rational Software Corporation (India) Ltd 3K, Esteem Asram, Koramangala Indl. Layout Sarjapur Road, Bangalore 25

Respondent

(By Smt H Vani, Adv.)

Appeals are filed under S.260 A of the Income Tax Act praying to allow the appeal and set aside the orders of the ITAT, Bangalore in ITA 609/Bang/2008; ITA 608/Bang/2008 & 610/Bang/2008 dated 14.11.2008 confirming the order of the Appellate Commissioner and confirm the order of the Asst. Commissioner of Income Tax, Circle 12(4), Bangalore.

Appeals coming on for hearing this day, Vineet Saran J, delivered the following:

JUDGMENT

The Revenue has preferred these appeals against the order passed by the Tribunal holding that the remittances towards the cost of the software products imported from foreign suppliers is not royalty and hence there was no liability for deduction of tax under S.195 of the Income Tax Act, 1961 ( ‘Act’ for short) and accordingly, the provisions of S.40(a) (i) of the Act are not attracted.

This Court had an occasion to consider the assessee’s case itself and the order passed by the Tribunal holding that the remittances towards costs of the software products purchase/imported from foreign suppliers is not royalty, was set aside by this Court in ITA 261/2006 following the judgment of this Court in the case of Commissioner of Income Tax & Anr. Vs Samsung Electronics Pvt Ltd – ITA 2808/2005 & connected cases decided on 15.10.2011.

It is submitted by the learned counsel for the assessee that the assessee has preferred an appeal against the said order in ITA 261/2006

before the Apex Court and it is pending consideration in Spl. Leave Petition (Civil) 19092/2012. In the event the assessee succeeds before the Apex Court, then S.40(a)(i) of the Act is not attracted and therefore, a consequent order is to be passed. Even if the assessee does not succeed before the Apex Court and S.40(a)(i) of the Act is attracted, still its claim in terms of Art.24 (4) of DTAA between India and the Netherlands that a similar disallowance was not provided under the Act under S.40(a)(i) if the payment was made to a resident, is to be considered and a proper order is to be passed.

Per contra, learned counsel for the Revenue submits that the said question was not raised before any of the authorities and for the first time, it is being raised before this Court.

In view of the judgment of this Court in Samsung Electronics Pvt Ltd case, as already the earlier order of the Tribunal is set aside by this Court, the impugned order passed, which is running counter to the said judgment, requires to be set aside and therefore, the appeal is allowed and the substantial question of law is answered in favour of the Revenue and against the assessee.

However, in the event the assessee succeeds before the Apex Court, it is cvlear that this order also cannot come into effect. The assessing authority shall therefore, pass an order under S.260(1A) of the Act, based on the outcome of the assessee’s appeal before the Apex Court. If the assessee loses his battle before the Apex Court, then before giving effect to this order, the assessing authority shall consider the application of Art.24(4) of the DTAA between India and the Netherlands. Though the said question is not raised by the assessee before the authorities, the same being purely a question of law and the said DTAA being a beneficial piece of delegated legislation, if the assessee is entitled to the benefit of the same, that cannot be denied to it. Accordingly, the appeals are allowed with the aforesaid observations.

Ordered accordingly.

Sd/- Judge

Sd/-

Judge An